Mixing applied science with rare options to target Samsara (IoT) opportunities
Mobile phone options with Trismegist San via Shutterstock
Here’s a dirty little secret about the rare option screener: Every day, you will find securities that cause algorithms due to unusual transactions compared to previous trends. But that doesn’t mean that every idea on the list is enthusiastic. We had to find a way to mathematically identify probabilistically attractive transactions. Otherwise, you’ll be chasing noise.
For those looking for an empirically persuasive idea, Samsara (IoT) should be on your radar. In my column “The Satathe Spread,” I stated that providers of fleet management and safety platforms (one of the leaders of applied artificial intelligence) may have a realistic chance of moving higher due to rare quantitative signals.
You will reach that point later. Recently, IoT stocks have been one of the highlights of Barchart’s rare stock options volume screener. On Friday, the total options volume reached 9,562 contracts, representing an average lift of 52.12% over a month. The call volume reached 8,531 contracts and reduced the volume with 1,031 contracts, resulting in a put-to-call ratio of 0.12.
On the surface, this ratio appears bullish, meaning more trades are more attractive than puts. However, the option flow focuses only on large block transactions that are likely to be made by institutional investors, but showed that net trade sentiment of the day slipped to $131,200 over parity, thus favoring the bear.
Most calls? They are also known as credit-based transactions. In other words, traders were taking on the risk that IoT stocks would not rise to profitability thresholds. This is approximately $44.20 with an expiration date of September 19, 2025.
Option flow data may seem discouraging as an adventurous speculator at first, but it can aim for profitability rather than the implicit limits mentioned above.
In actual analysis, this study must disclose the null hypothesis. Regarding the equity sector, the null hypothesis is the assumption that there are no misvaluations. In other words, whether you read this article about IoT stocks or not, your performance will not deviate from the expected norm. So, our job as an analyst is to reject the null. That is, it presents an investment or trading idea that has a higher chance than the random that generates alpha.
In this case, the null hypothesis is defined as the baseline probability (after January 2019) of rising IoT inventory over a week. Therefore, my alternative hypothesis should certainly beat this performance statistics. Otherwise, writing this article would be pointless at all. Luckily, I’m not a business that wastes my time.
However, it is not possible to use continuous scalar signals for stock prices to provide empirical and counterfeitable signals. Instead, I prefer to compress (discretize) the price action into a market width or sequence of cumulative and distribution sessions. Through this approach, route demand can be analyzed. At the end of the session, was the market a net buyer or net seller?
By performing the above exercises at 10-week intervals, we were able to classify Samsara’s demand profile as follows:
L10 Category
Sample size
Increase probability
Baseline Probability
Return to the top
2-8-D
2
50.00%
52.41%
5.32%
3-7-D
11
54.55%
52.41%
7.00%
3-7-u
2
0.00%
52.41%
n/a
4-6-D
twenty three
65.22%
52.41%
6.21%
4-6-u
5
80.00%
52.41%
11.61%
5-5-D
26
61.54%
52.41%
6.37%
5-5-u
20
60.00%
52.41%
4.27%
6-4-D
11
45.45%
52.41%
7.11%
6-4-U
42
42.86%
52.41%
5.19%
7-3-D
1
0.00%
52.41%
n/a
7-3-u
19
57.89%
52.41%
6.08%
8-2-U
4
25.00%
52.41%
19.07%
9-1-U
1
0.00%
52.41%
n/a
Over the past two months, IoT stocks have flushed the 4-6-D sequence. It involves a negative trajectory over 4 weeks, 6 weeks of down, and 10 weeks. Usually, a balance of distribution sessions is accumulated, so the Bears are expected to take control of the procedure. However, 4-6-D historically represents an emotional reversal.
At 65.22% of cases, the median return is 6.21% as a result of the following week’s price action. If the Bulls maintain control for two weeks, the median performance is an additional 3.75%. In theory, IoT stocks are closing at $39.24, so they could be poised to exceed the $43 level in the coming weeks.
Interestingly, last week, IoT also flashed 4-6-D sequences, with performance at 5.03% over the five days starting Friday. So there could be something to cook here.
At this point, perhaps the most appealing idea is that the 40/41 Bull Collosspread will expire on August 15th. For this transaction, you will buy a $40 call and sell a $41 call at the same time. If IoT stocks rise through a short strike price ($41) when they expire, the maximum reward is also $50, which means a 100% payment.
So, the question is, how reliable is the 4-6-D sequence? Because the market is an open system, anything can happen, adding complexity to every transaction. However, when performing a one-tailed binomial test, the above sequence produces a p-value of 0.1594. Colloquially, this means there is an 84.06% confidence level that the signal is not just noise.
Certainly, 84.06% is not considered statistically significant, and science requires a 95% threshold. However, science deals with closed systems rather than open systems like stock arenas. In the context, I argue that the 4-6-D sequence is empirically intriguing. It may be worth considering as it requires high payments and low debit.
On the date of publication, Josh Enomoto had no position (directly or indirectly) in any of the securities mentioned in this article. All information and data in this article is for informational purposes only. This article was originally published barchart.com
